-LRB- CNN -RRB- -- Travel to Shekou , a port city in Shenzhen , and you will find the stirrings of something unexpected : entrepreneurial capitalism .

This part of China , home to many mega-factories like those of Foxconn -LRB- which makes Apple 's iPads -RRB- is known as the world 's workshop . But if you visit Microport , a startup firm funded by venture capital , you will find a group of tech entrepreneurs with a global mindset trying to disrupt an overpriced , legacy-ridden industry -LRB- in their case , the one for medical diagnostics equipment -RRB- . In the staff canteen hangs a portrait of the late Steve Jobs uttering his motto , `` Stay hungry , stay foolish . '' Microport 's dynamic founder says his dream is for China to become an innovation powerhouse that produces its own homegrown Apple .

Much has been made about Chinese sweatshops sucking away American jobs , of currency manipulation and unfair trade practices . In fact , there 's a bigger threat to American competitiveness .

Cheap China is fading fast , and innovative China is emerging . The Chinese government is investing tens of billions of dollars into science and engineering research and education , and lavishing tax breaks and subsidies on technology firms and clusters , in an effort to leapfrog the country to the cutting edge of innovation .

How should America and other developed economies respond and stay on top in the 21st century 's ideas economy ? For a start , do no harm . Politicians should remember that global innovation is not a zero-sum game : China 's rise does not have to come at America 's expense . Three decades ago , many Cassandras wailed that Japan , with its centrally planned innovation investments and its superior cultural values , would crush the West . In fact , Japan 's peaceful rise went hand in hand with America 's entrepreneurs forging the new industries of the digital age .

That is why bashing China and using it as an excuse for industrial policies that subsidize uncompetitive domestic companies is a folly . This applies as much to Solyndra , a bankrupt American solar firm that got taxpayer subsidies , as it does to the lagging French toymaking industry , which has been declared `` strategic . ''

An even more dangerous prospect is a trade war , something that might happen as a result of Western governments ganging up on China at the World Trade Organization over its policies on rare Earth minerals . Top-down efforts to pick technology winners are bound to waste taxpayers ' money . And forcing a trade war would actually hurt America , since its economy benefits the most from an open global flow of goods , people and ideas .

America 's leaders should see China 's inexorable surge as a rising tide that can lift all boatsâ $ '' providing , of course , that you patch the holes in your vessel first . That means shoring up the things that made America the world 's innovation powerhouse in the first place .

First , America needs to reverse its policies that , since 9/11 , have turned hostile toward talented immigrants . For decades , the American economy benefited from the gift of the world 's brightest and most enterprising . Studies have shown that more than a third of the start-ups in Silicon Valley have at least one founder born in India or China .

Bill Gates points out the absurdity of today 's immigration policies . Brilliant Chinese students make up much of the graduate program in computer science at the University of California at Berkeley , benefiting from a subsidized education . When they graduate and want to start companies that would hire many Americans , they are refused visas . So , as Gates notes , they go home and start companies there that compete with America instead .

Another hole that needs to be patched is in research funding . America 's funding for research , measured as a percent of national output , has stagnated even as the rising giants of the developing world are investing heavily . It is wise to invest during economic recessions in those few thingsâ $ '' like education , smart infrastructure and researchâ $ '' that are the essential enablers of longer term innovation , productivity and higher economic growth .

Finally , America can make it easier for young firms , which have created almost all the net new jobs the last few decades , to find capital . Banks usually refuse to fund start-ups , and even many venture capitalists have turned risk averse . Typically , entrepreneurs rely on friends , family and fools . But an important bill in Congress now that has support from both parties and the White House would make it easier to tap wider networks through `` crowdfunding . '' Congress should pass this bill quickly , and help entrepreneurial energy to kick-start growth .

The surest path from stagnation to rejuvenation lies in innovation . If America wants to stay at the top , it needs to gear up on innovation .

The opinions expressed in this commentary are solely those of Vijay V. Vaitheeswaran .

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Vijay Vaitheeswaran : Cheap China is fading fast , and innovative China is emerging

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Vaitheeswaran : If America wants to stay on top , it needs to spur innovation

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He says America needs better immigration policies to retain talents

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He says Congress should pass a bill to make it easier to fund entrepreneurs